Recently reported in the press is the news that SMEs in Singapore are complaining about the restrictions on foreign workers and want the government to loosen the restrictions that limit the hiring of foreign workers. A recent business survey indicates that these SMEs are quoting the same excuses that they have using all along - locals shun labour-intensive jobs, and the turnover rate for foreigners is lower. These business also want to hire foreigners because this reduces business costs, or, in other words, because foreign labour is cheap.

These latest results show that Singaporean businesses are heavily dependent on lowering the cost of factor inputs in order to compete in the market, rather than improving factor productivity. The difference between the two is illustrated as follows.

Company A hires Singaporean worker Mr Chan at $15 an hour to produce 10 widgets per hour. Mr Chan manufactures the widgets using equipment Y, which depreciates at $25 per hour. The cost of production per widget is hence $4 per widget: ($15+$25)/10 = $4. Company A can lower the cost of production by either lowering the cost of the factor inputs (labour or capital equipment), or by improving the productivity of these inputs.

Company A chooses to lower the cost of production by reducing the cost of factor inputs. Company A fires Mr Chan and hires Mr Balakrishnan from India who is willing to work for $5 per hour. However, Mr Balakrishnan was previously a farmer and he has only started to learn how to operate the manufacturing equipment, and so he can only produce 8 widgets per hour. Company A's strategy lowers the cost of production from $4 per widget, to $3.75 per widget: ($5 + $25)/8 = $3.75. However the the productivity of Company A has declined. Its production per worker has fallen to 8 widgets per hour, compared to its previous output of 10 widgets per hour.

Company B chooses a different strategy. Company B starts out with the same equipment as Company A, and employs Mr Wong at the same wage as Mr Chan. Company B also invests in research & development to improve the technology of its manufacturing equipment. Because Company B has been investing in research & development, it has a new piece of equipment. This equipment costs more, and has a depreciation rate of $43 an hour,compared to $25 previously. Company B also trains Mr Wong to use this new piece of equipment. The result of this improved manufacturing process is that Mr Wong is now able to produce 16 widgets per hour, compared to 10 widgets previously. At the same time, because of Mr Wong's improved skillset, Company B increases Mr Wong's salary to $17 per hour.

The net result of this is that Company B's cost of production is now $3.75 per widget = ($17+$43)/16. This is the same as Company A's result. However, unlike Mr Chan, Mr Wong not only keeps his job, but also has received a pay raise. Mr Wong is also able to afford another child because of his higher income, and help improve to Singapore's poor fertility rate. Furthermore, the longer term impact of this strategy is that Company B is able to continue lowering the cost of production, because it can continue to invest in R&D. Company A, however, is unable to bring down its costs further, because it is unable to find workers who are willing to work for much less than $5 per hour. Furthermore, Company B is able to expand its production and hire the experienced Mr Chan, who was previously fired by Company A.

The difference between Company A and B is the difference between night and day. Company A has chosen the strategy of lowering the cost of factor inputs, but this strategy rarely results in sustainable competitive advantage. In most cases, this strategy results in price wars and intense competitive rivalry that ultimately kills profitability when such price wars are not accompanied with increases in productivity.

Company B, however, has a sustainable competitive advantage. Its R&D program will continue to produce better equipment and labour productivity gains, and will allow it to lower its cost of production even further. In contrast, Company A cannot reduce its factor costs much further and will soon be put out of business.

Two fundamentally different strategies, two fundamentally different results.

Singaporean businesses are thinking like company A. Instead of focusing on improving productivity, they have chosen to pursue lower factor input costs. They repeatedly complain that Singaporean workers are too expensive and want to hire cheap foreign labour instead. Eventually, like company A, these businesses will be outcompeted by their more innovative counterparts.

In view of these SMEs' mentality, is it surprising at all that Singapore's productivity growth has remained stagnant relative to the US since 1995, as the recent Singapore Competitiveness Report shows? Is it surprising at all that the standard of living for the average working Singaporean has hardly improved in recent years?

No.

Singaporean businesses need to buck up and start innovating. The government also needs to stop feeding this quick-fix mentality with its liberal immigration program.

Quick-fix is ultimately no-fix, and Singaporean businesses must innovate or die.

Tuesday, December 01, 2009

Earlier this decade, PM Lee Hsien Loong & the PAP faced a problem with Singapore's population economics. With the country's fertility rate way below the replacement rate of 2.1, Singaporeans were not making enough babies to replace themselves. The potential burden of this phenomenon was obvious - amongst other issues, the cost of supporting an aging population would have to be borne by a smaller workforce, and the government did not want to have to sustain this liability in the future.

In order to arrest the problems presented by a resident population failing to replace itself, the PAP has resorted to the quick-fix policy of opening the country's shores to foreigners. A massive influx of immigrants and foreigners has resulted in the rapid increase of Singapore's population. Between 2003 and June 2009, the population increased from an estimated 4.2m to 5m, or an increase of 19 per cent in less than a decade.

While this has, in the short-term, drastically expanded the productive work force, the longer-term impact of the PAP's immigration policy has been to exacerbate the already challenging living conditions which have discouraged Singaporeans from having children. Directly attributable to the Government's immigration policy, are two major side-effects which have made it more difficult for Singaporeans to have children.

Firstly, the cost of living for the majority of Singaporeans has risen. In particular, the escalating cost of housing to unaffordable levels is acting as an obvious hurdle towards family formation. A couple which is unable to afford a roof over their heads will obviously find it very difficult to start a family. After all, the most basic thing parents must provide to their children is a roof over their heads. Yet, instead of bringing down the cost of housing, the combination of a spike in housing demand and stagnation in supply has sent property prices to record levels. (ref. 'PAP MP blames young couples who cannot get flats for not “planning ahead”')

Secondly, labour productivity has declined. Singapore's labour productivity levels have been falling for six consecutive quarters starting in the fourth quarter of 2007. The decline has been worsening each quarter, with the first three months of 2009 seeing the largest drop so far at minus 14.7 percent. (ref. "National focus needed on efforts to boost labour productivity", CNA). Singaporeans are working harder and longer and with less to show for it. Naturally, they have less time and money to spend on their children.

The benefits of productivity on family formation are obvious. Workers who accomplish the same amount of work in shorter periods of time will have more time to spend on their family. Similarly, workers who accomplish more work in the same period of time will be able to earn higher incomes and thus be better able to afford a family. Instead of improving productivity, however, the PAP has chosen an immigration policy which has had a direct impact on this key economic statistic. The large influx of foreign workers in recent years means that each worker doesn’t have to work as hard. It also means that positions are constantly being filled by newbies without experience. (ref. 'Declining productivity here a problem')

The combined effect of housing price inflation and the decline in labour productivity has been to make the real cost of bringing up a child even more expensive, and thus further discourage couples from having children. Meanwhile, little attention is being paid to initiatives which can make a genuine impact on the standard of living.

The solution to the housing affordability problem is simple. Either supply more flats or decrease the demand. The lack of proper planning by the PAP on this issue is quite perplexing, but this issue has been dealt with by other writers and I will not repeat their arguments here. (ref. "Immigration and public housing: Should the govt or the people plan ahead?")

The deeper problem is that of labour productivity.

An improvement in labour productivity does not only require the education & upgrading of the workforce, but a fundamental change in mentality of employers from a low-cost of labour mentality to a higher value-added mentality. Meanwhile, it seems that the only solution that the PAP has to throw at the productivity problem is to point the finger at workers for not upgrading themselves.

While skills upgrading is part of the solution, it is only one side of the productivity equation. Just as important is paying attention to improving the working conditions of employees and protecting workers' rights. Employers in Singapore blame Singaporeans for shunning so-called 'menial' or ‘unskilled’ jobs, yet the only solution they seem to have is to throw cheap foreign labour into these jobs such as construction or frontline retail services. The tougher but more rewarding option of professionalising and dignifying such jobs is thrown to the wayside.

Contrary to what some may think, a career in construction can be a meaningful, dignified one. A construction worker who takes pride in his technical work and who has accumulated experience will certainly be much more productive than a cheap foreign import. When given the right tools and proper working conditions, his higher productivity will also justify a much more respectable salary than the pittance that is currently paid in the industry. Yet, keeping wages low and working conditions poor is a surefire way to make the job disrespectable, and for companies to lose their top performers. (ref. “TOC Special Feature: Is Singapore really slum-free?”, TOC)

Similarly, frontline sales staff in retail can make a significant difference to the bottom line if they are well trained, respectably paid, and given good working conditions. Conversely, untrained foreigners who do not even speak the language of business, are obviously unable to add significant value to a retail operation and sometimes even turn away prospective sales. (ref. “Australian tourist complains about PRC workers in Singapore who cannot speak English!”)

In spite of this simple logic, the government's immigration policy continues to foster a low-cost mentality rather than a value-added mentality by allowing local businesses to import cheap labour, which only serves to keep wages depressed and working conditions lousy. To be fair, enterprises are also to blame for perpetuating their low-cost mentality. But if nobody makes an effort, how will things ever improve?

Labour productivity also improves with innovation & entrepreneurship. A significant improvement in manufacturing techniques can allow a factory to dramatically increase its output given the same number of workers. Meanwhile, technological innovations in engineering or computing allow the formations of new enterprises and the creation of value-added jobs. Yet, the government continues to pursue policies which encourage an iron-rice bowl mentality rather than bold enterprise.

In particular, the scholarship system encourages Singapore's brightest students to pursue a safe (bonded) career in government rather than one in the private sector. It systematically sucks out the brightest minds from innovating in the marketplace, into the ranks of the public service. Instead of finding solutions to scientific problems, bringing new products to market or searching for a cure for cancer, Singapore's top young brains are writing policy papers and goodness knows what else, in 'silent resentment and ultimate dissatisfaction' (ref. the late Dr Allan Ooi).

The PAP argues that the government needs top brains in order to run efficiently and effectively. Yet, the stark reality is that entrepreneurs and innovators such as Olivia Lum, Sim Wong Hoo and Ron Sim have individually created many more jobs for Singaporeans than any government scholar or bureaucrat. Is it no wonder, then, that leaders such as S. Dhanabalan and DPM Jayakumar (ref. "Jayakumar wants Singapore top students to study in local varsities") have recently lamented that allowing top students to go overseas is a bad thing? And, while it may appear that the government is unrolling campaigns encouraging entrepreneurship in schools, such campaigns are but lip service when millions of dollars continue to be thrown at scholarships designed to suck youngsters into government ranks.

The recent housing pains and productivity drops are symptomatic of a quick-fix mentality that can ultimately only exacerbate Singapore's population and economic problems, rather than alleviate them. Until fundamental, structural issues in Singapore's economy are tackled head-on, Singapore will continue to see its fertility rate remain low and its productivity (and competitiveness) slide. At the end of the day, the PAP cannot continue to pump more and more immigrants onto this little island. Sooner or later, Singaporeans need to find a way to return their fertility rate to replacement levels, and make the cost of family formation affordable. Singapore will need to find a way to foster genuine innovation and entrepreneurship and to improve worker productivity.

So far, the PAP doesn't seem to be doing very well in coming up with the right solutions.

Tuesday, November 17, 2009

Here is a collection of articles intelligently explaining why the market rally is ill-founded and why we are in for a bigger bust some time in the future. All that the Americans have done is put a giant humongous band-aid on their economic wounds without doing anything substantive to solve the underlying problems.

In order to rescue the financial markets, the US government has put its credit on the line by bailing out shaky institutions and offering guarantees on deposits and loans. Obama has also revealed that America is likely to increase its debts by $9 trillion in the next ten years. Add this figure to the existing $12 trillion of federal debts, that is more than $20 trillion.

Assuming an interest rate of 5%, that is about $1 trillion which has to be allocated in the budget to pay creditors yearly. Where is Uncle Sam going to get the bulk of this money except to turn to its printing press? And we are not even thinking about other liabilities in its social security and health care.

Is there a point where the party stops and nothing works anymore? Very likely yes. The Federal Reserve cannot cause the market to rise indefinitely by printing money at will. Its status as the global reserve currency is at stake after abusing it for so long.

It is a matter of time before we experience another major recession because the key lessons from this financial crisis were forgotten easily and people are back to their greedy speculative ways. But the next time round, the Federal Reserve may find its hands tied, with very few options available.

During this crisis, Bernanke--while saving the financial system in the short term--has done nothing to break this long-term pattern; worse, he exacerbated it. As a result, unless real reform happens soon, we face the prospect of another bubble-bust-bailout cycle that will be even more dangerous than the one we’ve just been through.

Based on the fundamentals, neither stocks nor oil should be trading at today's lofty prices, nor should gold, for that matter. Yet people are chasing their prices up, so anxious are they to buy.

In the case of the dollar, it has fallen so much that it is now undervalued, in terms of purchasing power parity, yet investors continue to sell.

Underlying this behavior is what I would call twisted logic.

When it comes to the world of investments, rising prices cause people to buy while falling prices beget selling. This is exactly the opposite of what they do out there in the real world of goods and services.

Here, most of us look for bargains -- we tend to buy more when prices are low. When prices go up, we step back and buy less or none at all.

For their own sakes, it is too bad that investors do not carry their real-world attitudes to the world of stocks, bonds and commodities. If they did, we would experience fewer, if any, bubbles no matter how much liquidity fills the financial system.

I hope you get it by now. I am not a market bull. And neither is Paul Farrell. Bernanke won't turn off the liquidity tap. Meanwhile Geithner, Paulson & friends continue to prop up the crap financial institutions like Citigroup, Bank of America, AIG, Fannie Mae and Freddie. America is super obese because of its addiction to leverage and debt, and speculators are punting up the stock market when the economy is hardly showing a recovery.

Good luck to all of you currently in the stock market. I hope, for your sake, that I am wrong.

Wall Street's 2012 meltdown sweepstakes

It's coming in 2012: Another, bigger meltdown of Wall Street's "too-greedy-to-fail" banks. No, this is not another fanatical warning about that Dec. 21, 2012 end-of-days prediction based on the Mayan calendar, though you may well ask "Who will survive?"

Here is what's happening: History is repeating itself. Wall Street's soul-sickness is setting up a new meltdown. Dead ahead. Be prepared.

...

Unfortunately America's collective brain was addicted to the adrenaline rush of gambling in a risky bull. The euphoria is intoxicating. We were caught up in a game of musical chairs, squeezing out every last dollar of return, blind to the catastrophe ahead until caught by surprise. Unfortunately, Wall Street lacked a moral compass and stole trillions from American taxpayers. Today, the only lesson Wall Street has learned is "greed is good." Now the beginning of the end has become a moral tragedy that is setting the stage for an implosion of Wall Street, capitalism and our economy circa 2012.

Everyone's still listening, still in a trance

Yes, another meltdown is coming; it's inevitable. This time, I've decided to do more periodic updates -- a watch list of alerts, warnings and predictions. Just like the updates done for over a decade, except this time we're more aware that few in power will listen, not Wall Street, not Washington, not Corporate America. But you must.

Nouriel Roubini and SocGen are bearish on the stock markets. Now, another top analyst, Meredith Whitney, famous for her right call on the collapse of Citigroup and other banks, now says that the market rally is not backed by fundamentals.

NEW YORK, Nov 16 (Reuters) - Bank analyst Meredith Whitney said on Monday she does not believe the U.S. equities rally is based on fundamentals, and she is as bearish as she has been this year in the stock market.

In an interview with CNBC television, Whitney said there is "no way" the banking sector is well capitalized and it is time to reduce weighting in large-cap banks.

Whitney also said she sees a double-dip U.S. recession.

The main U.S. stock indexes pared some of their gains during the interview.

Whitney wrote a particularly pessimistic, but accurate, report on Citigroup, on Oct. 31, 2007, which got her attention from many Wall Street analysts and the news media. She has since followed this report with similar reports and predictions, which have tended to leave the companies involved with lower stock prices as the market has taken her opinion seriously. One of her claims is that goodwill is built-in to a lot of companies' share prices, and that as the market moves into dark times, this goodwill will dissipate.

In 2007, Whitney was listed as the second best stock picker in the capital markets industry on Forbes.com's list of "The Best Analysts: Stock Pickers", as well as being named "one of NY Post's 50 Most Powerful Women in NYC.

Whitney's extremely bearish view on banks landed her on the cover of the August 18, 2008 issue of Fortune Magazine. Even before the problems in September that befell Merrill Lynch and Lehman Brothers, she is quoted as saying, "It feels like I'm at the epicenter of the biggest financial crisis in history, however even a broken clock is right twice a day" In October 2008 Whitney, was ranked as one of Fortune 500’s “50 Most Powerful Women in Business.” In 2008 she won CNBC's "Power Player of the Year" over Jamie Dimon, Ben Bernanke, and Hank Paulson.

Tuesday, November 10, 2009

SocGen's Albert Edwards and economist Nouriel Roubini are sounding a warning that the recent rallies in asset markets are being driven by a liquidity bubble that is going to burst spectacularly, perhaps as soon as next year.

Reuters reports as follows:

SocGen's top analyst sees market lows next yearMon Nov 9, 2009 11:54pm ESTHONG KONG (Reuters) - Albert Edwards, a top analyst with French bank Societe Generale, expects global markets to hit a new low in 2010, adding that he would not be surprised if the global economy enters another recession next year.

Edwards, one of the leading equities bears and a long-term critic of the policies of Western central banks, is skeptical of popular opinion that extreme policy response will safeguard the West against a repeat of Japan's lost decade of the 1990's.

Edwards said he expected that at some point China would go into recession, calling people's excessive faith in growth stories a "sick joke."

Japan would run into difficulty funding itself next year as demand for Japanese government bonds waned and bond yields rose further, he said.

The significance of higher Japanese government bond yields was that it would cause some Japanese investors, who have been investing overseas in search of higher returns, to bring that money back home, he said.

Meanwhile, Nouriel Roubini, in this essay, warns of the effects of the 'mother of all carry trades'

"the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

...

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments."

Personally, i don't know exactly what is going to happen, but I certainly agree with these two analysts that the recent market rallies certainly seem to be fueled by exceptionally loose credit rather that proper market fundamentals. The US and European economies are still in the dumps, propped up only by record levels of government spending and record levels of liquidity as supplied by the central banks. Instead of taking the hard medicine of properly restructuring the economy, all we see is continued support of 'too-big-to-fail' sick giants and more and more borrowing.

Sooner or later a liquidity bubble is going to form (it probably already has) and sooner or later this bubble is going to burst... how big and how hard the burst and subsequent crash is going to be, I don't really know. But if SocGen and Roubini are right, then it looks like it's going to be a loooong way down from here.

Sunday, November 08, 2009

I refer to the letter, "Be prouder of this great little red dot (ST, Nov 7)" by Mr Sam Ahmed, and find it amusing that the author criticises Singaporeans for complaining about their own country or wanting to "save up and leave."

Indeed, it is ironic for a person who has left his own country, lived his life in several cities around the world, and finally decided that a country not his own should be where he wants to settle down - should then have the gall to deprive others the right to choose where they want to live, or to decide that their country of birth has room for improvement.

Mr Ahmed, of course, has never been a Singaporean taxi driver, nor has he ever been a Singaporean undergraduate. Incredibly, however, he claims to have the insight and wisdom to understand how 'foolish' Singaporean taxi drivers and undergraduates are when they criticise their own country. Perhaps Mr Ahmed should take a few years off his own busy schedule to attempt to live life as a taxi driver in Singapore and to study as a Singaporean undergraduate before blowing his trumpet in the national newspaper.

Mr Ahmed has also clearly never paused to consider the fact that amongst the many other foreigners who have passed through Singapore's shores, he is but amongst a minority who have decided to settle here. This leaves me wondering, does Mr Ahmed have superior judgment to all those other foreign fools?

The hypocrisy of foreign residents like Mr Sam Ahmed is astounding. While attempting to belittle the opinions of Singaporeans, they conveniently ignore the fact that they themselves have abandoned their own homelands for another one which they perceive to be a superior place to live. Where, Mr Ahmed, is your own pride in your own home country?

Mr Ahmed is patently unqualified to make any of the comments he made in his forum letter. Indeed, It is time for foreigners like him to keep their mouth shut and mind their own business.

Singaporeans are fully capable of making their own informed decisions and forming their own opinions about their country. The last thing we need is a foreigner with little understanding of how things work, pontificating about how Singaporeans should think about their homeland.

------------

ST Nov 7, 2009

Be prouder of this great little red dot

I REFER to Thursday's report, 'Singapore a top choice for migrants'. I am a new permanent resident, and this report not only makes me proud, but also affirms my fundamental belief that Singapore is destined to be a global centre from a financial standpoint and a cultural and social perspective.

After living most of my life in Sydney, Paris and Tokyo, I have embraced Singapore as my home - I never felt so intimate with the other cities.

My only beef with Singapore is that its citizens do not necessarily share my passion for this country. From personal observations, I have noticed that Singaporeans are both competitive and in a constant pursuit to improve their daily lives, whether economically or in some other sphere.

In this challenging environment, it is natural that one loses perspective of the overall big picture, which is that Singapore, a country of about 700 sq km, has come a long way from a backwater trading post to establishing itself as arguably the financial and technological hub of Asia.

Perhaps Singaporeans should be prouder of their country. Cab drivers complain about everything and university graduates I come across talk of saving up and moving to Spain or Italy.

Perhaps it is time citizens took a step back from the frantic demands of everyday life to reflect a little on what their country has to offer - a safe, ecologically aware and technologically advanced metropolis with excellent public transport and infrastructure, a thriving arts scene and a welcoming multicultural local population.

If foreigners from all over the world can see this and are coming to Singapore, why can't Singaporeans?

Happiness, long holidays and a sense of well-being may not be (Singapore’s) yardstick for economic performance, but Nicolas Sarkozy believes they should be embraced by (Singapore) in a national accounting overhaul.

France’s president on Monday urged other countries (like Singapore) to adopt proposed new measures of economic output unveiled by a panel of international economists led by Joseph Stiglitz, the US Nobel Prize winner.

Mr Sarkozy, who set up the Stiglitz-led commission last year, said that (Singapore) had become trapped in a “cult of figures”.

Insee, the French statistics agency, would set about incorporating the new indicators in its accounting, Mr Sarkozy said.

One consequence of the commission’s proposed enhancements to gross domestic product data would be to improve instantly France’s economic performance by taking into account its high-quality health service, expensive welfare system and long holidays. At the same time, the commission’s changes would downgrade (Singapore's) economic output.

The commission suggested a series of improvements to the way GDP was measured. It proposed accounting for people’s well-being and the sustainability of a country’s economy and natural resources. “(In Singapore), citizens think we are lying to them, that the figures are wrong, that they are manipulated,” said the president. “And they have reasons to think like that.

Certainly, I do not think we will expect to see the Singapore Government incorporate citizen happiness, well-being or the state of the welfare system into its GDP accounting system.

Because that would make us look like a third-world country. Let's face The Ugly Truth - Singaporeans are stressed out chickens & unhappy rat-racers. They work hard their entire lives just to be able to buy that condo or that landed property & that BMW/Mercedes Benz. Many of them can't wait to get out of the country to some place where they will not be treated as second class citizens in their own back yard.

Indeed, as I explained before, GDP is a lousy indicator of a people's wellbeing. And it's what the Singapore governnment has been using all along to measure its performance and to justify the astronomically inflated salaries of its ministers.

God bless the day we finally depose of the Leegime and have someone who thinks like Mr Nicholas Sarkozy.

Tuesday, August 11, 2009

The major news headline to hit the press in July was the failure of the announced leadership transition by Temasek Holdings to materialise. Back in February, Ho Ching announced her resignation and that she would hand over power of Singapore's Sovereign Wealth Fund to Charles Goodyear. At that time, the Merrill-BoA merger was being finalised and the BoA share price was hitting record lows. Here's a snapshot, if you don't remember.

At the time, the announcement was very surprising indeed, to observers who had been used to criticising the fact that Mdm Ho Ching was the Prime Minister's wife, as well as Lee Kuan Yew's daughter-in-law. That the top corporate job in Singapore was held by yet another member of the Lee family was, in the eyes of many observers, evidence of cronyism and nepotism in the Lee regime.

Many speculated over the reason for the sudden announcement of the stepping down of Ho Ching to give way to Charles Goodyear. Perhaps it was because of the massive losses that Temasek had sustained due to its over-allocation of resources to the financial sector. Perhaps it was because Ho Ching couldn't take the criticisms of having ascended to the CEO position because of her connections. Whatever the case, it seemed that Temasek was taking a significant step towards its image as a genuinely independent entity - by putting a foreigner in charge.

Fast forward five months, and Chip goodyear is leaving Temasek before even spending a single day as CEO. He is leaving amicably, due to 'strategic differences' - so goes the official line.

Of course, every Singaporean is left scratching his/her head trying to figure what is going wrong with the Temasek leadership transition. According to sources,

"A person familiar with the situation said last week that Mr. Goodyear's proposals for the company's new strategic direction were considered too risky by some, without elaborating. He also said Mr. Goodyear planned changes in senior management that weren't well received by Temasek's board."

But what are the real reasons? Singaporeans will never know... because Tharman Shanmugaratnam is Ho Ching's best friend.

Aug 18, 2009S'pore ParliamentNo goodwill for GoodyearBy Robin Chan

FORMER chief executive-to-be Mr Charles Goodyear received no goodwill payment for his four months' work at Temasek Holdings the Finance Minister revealed in Parliament.

But after 25 minutes of grilling, the House emerged none the wiser over what exactly the strategic differences were that led to his sudden departure.

Members of Parliament threw question after question at Mr Tharman Shanmugaratnam asking him to get Temasek to share with the public what went on behind the scenes but he would not budge.

He said that disclosing the information would serve no strategic purpose and that was not unlike the actions of other publicly-listed companies in the private sector.

'People do want to know, there is curiosity, it is a matter of public interest. That is not sufficient reason to disclose information. It is not sufficient that there be curiosity and interest that you want to disclose information,' he said in response to questioning from Mr Low Thia Khiang, opposition MP for Hougang.

He reiterated that the words in Temasek's statement to the public were carefully chosen and the Government would not add to that.

But of course. Did any of us really expect Mr Shanmugaratnam to reveal anything that we do not already know? Did any of us really expect to find out anything truly and genuinely useful about Temasek through the parliamentary proceedings?

Of course not - and that's because the Government bears ultimate responsibility for Temasek's stuff ups. Ultimately, the Government must bear the consequences of any mismanagement of reserves. Likewise, it will take credit for any 'good' news where Temasek is concerned. The Government has a vested interested in keeping information about Temasek cock-ups hidden away from public consumption.

Thus, can Temasek ever be expected to suddenly become transparent and candid about its management stuff ups and its investment errors? No, it will only be transparent to the extent that its shareholder demands it, and to the extent that regulations require. Since Temasek is not a publicly listed company, Singaporeans cannot expect Temasek to be transparent on the basis that its publicly listed subsidiaries are. And since Government ministers repeatedly say that it is not their role to comment on individual investments - Temasek will never come clean on individual investment decisions, nor will the truth ever be told about why Chip Goodyear quit.

No - what Singaporeans expect from Temasek - they first have to demand of the Government. If Singaporeans want transparency and accountability about Temasek's investments and policy decisions, they have to first demand transparency and accountability from the Singapore Government. If Singaporeans want information about Temasek's decision making process, they have to demand the same sort of information from the Singapore Government. They have to demand that Tharman Shanmugaratnam keep a close watch on the major individual decisions that Temasek makes - and in turn - either report this information to the Singapore people, or require that Temasek makes the appropriate disclosures. It is only after we establish a culture of tranparency and accountability at the highest echelons of Singapore's society, that the lieutenants & the troops will then follow in line.

Indeed, the Temasek Problem is Not a Temasek Problem; The Temasek Problem is a Government of Singapore problem. Ultimately, the quality of corporate governance of Temasek Holdings will mirror the quality of political governance of the Government of Singapore.

And until Singaporeans realise this, they will have to continue living with the opacity and secrecy that shrouds Temasek Holdings - protected as it is by its political masters.

Friday, May 29, 2009

2 major alternative commentary websites in Singapore's blogosphere, TOC and Wayangparty.com, have come out with their guns blazing and heavily criticising the government's proposed changes to Parliament.

Andrew Loh calls it a "A mockery of Parliament" because of the huge number of "loser MPs", "nominated MPs", and "walkover MPs." He says,

"Parliament being filled with a majority of un-elected members is a joke. Pure and simple, no matter what rhetoric the prime minister uses in trying to convince one and all to accept these changes."

Much as I have been a govt critic in the past, I think the changes announced by Lee Hsien Loong are actually a positive step forward for Singapore as a whole, and that TOC and Wayangparty have got it wrong this time. And much as I think I am going to receive major flak for my comments here, I feel it is necessary to make my case public.

Friday, May 22, 2009

Warning: This post contains several expletives. Readers who are offended by strong language are advised to proceed cautiously.

Myrna Thomas of Temasek has written to the press to "explain" the BoA divestment. Her press statement not only does not clarify anything, it only insults the intelligence of Singaporeans by repeating the same truisms and smokescreens that Temasek has been saying time and time again.

Why Temasek sold its stake in BoA

I REFER to recent reports and commentaries on Temasek's divestment of its Bank of America (BoA) stake. We would like to clarify some of the points raised.

Temasek invests with the objective of delivering sustainable returns over the long term. This means our investment strategy is not aimed at delivering target returns on a year-by-year basis. This is why we report our portfolio returns not just for a single year, but for various time horizons in our annual Temasek Review.

What the F*cK does this have to do with the BoA issue? You donks have been repeating this nonsense year in year out ad nauseum - it does not give us any information at all, it does not tell us anything - its completely useless statements that achieves nothing!!!

Wednesday, May 20, 2009

Forget about Investing for the "Long Term" - Temasek's new investment strategy has changed into "Buy High, Sell Low!!!"

What else could you possibly deduce from the fact that Bank of America's shares have surged 74% since our dear Ho Ching & company decided to divest of their BoA shares? This fact has been graciously pointed out to us by the New York Times - article appended below.

The world is watching our dear Singaporean SWF. And Temasek is becoming the laughing stock of the world financial community.

A commenter on the NYT blog has said:

Regarding Temasek’s decision to sell BofA shares near the low - perhaps sovereign wealth fund managers are really just government bureaucrats masquerading as fund managers? If anyone is going to take a loss on an investment - I’m glad it’s them.

— Posted by Jay Young

Earlier, David Faber of CNBC noted that Temasek's loss was one of the biggest losses ever recorded by a single fund on a single investment in Wall Street's history.

I'm not sure I want to be a Singaporean anymore.

---------------------------------------------------------------------New York Times - Dealbook

MAY 18, 2009, 11:13 AM Wall Street Warms Up to Bank of America

Kenneth D. Lewis may have gotten a rebuke from shareholders last month, but he was getting votes of confidence from Wall Street on Monday. Upbeat assessments from analysts at Citigroup and Goldman Sachs lit a fire under shares of Bank of America, the banking giant where he is chief executive — and was chairman until a few weeks ago, when shareholders voted to remove him from that latter post.

At first glance, the enthusiasm might seem to come at a strange time. Banking regulators just told BofA to raise nearly $34 billion, suggesting it was the most anemic of the 19 financial institutions that endured the government’s stress tests.

But some analysts think Bank of America’s efforts to raise the capital are proceeding well. If that overhang clears up, it could ease the pressure that has been weighing on the company’s stock price.

Analysts at Goldman raised BofA from neutral to buy and added the company to their so-called conviction list of recommended stocks. Analysts at Citigroup kept a buy rating on the shares, but had positive things to say about the integration of BofA and Countrywide, the troubled mortgage lender it recently bought, as well as its capital-raising plans.

BofA is using “at-the-market” stock sales to raise a large part of its additional capital cushion. That means the shares are quietly dribbling out in unknown quantities. Reading the tea leaves — and watching the volume of BofA stock trades — analysts at Citi, led by Keith Horowitz, estimate it has already raised $3 billion to $4 billion from selling new stock.

In addition, Bank of America raised an estimate $4 billion after taxes from the recent sale of part of its stake in China Construction Bank.

The biggest unknown appears to lie in BofA’s plan to convert about $16 billion in institutionally held preferred stock into common. If BofA can offer a price that is above the equivalent price of the common shares, it will minimize the dilution for current shareholders, the analysts said.

The analysts’ comments may be gratifying to Mr. Lewis, who endured some heated attacks at last month’s meeting from shareholders who lost money.

But Temasek, the investment arm of Singapore, could be feeling a bit of seller’s remorse. The fund recently reported selling its entire stake in BofA — at an enormous loss, by all accounts — some time before March 31. Since then, BofA’s stock is up about 74 percent.

Monday, May 18, 2009

Rear Admiral (NS) Lui Tuck Yew was the Minister of State for Education until March 2009, when he was promoted to Acting Minister for Information, Communications and the Arts with effect from 1st April 2009. With his promotion, he displaced the incumbent Dr Lee Boon Yang, who now found himself without a job.

Only 25 days after RAdm Lui's promotion, Dr Lee Boon Yang was the newly appointed non-executive Chairman of Keppel Corp, Singapore's largest industrial conglomerate. It was an event of little fanfare, and by the lack of any noise made by Keppel shareholders, you would have thought that everybody is happy about the change in leadership at the helm of Keppel's board of directors.

However, a careful examination of Dr Lee Boon Yang's CV, and the demands of the role of Chairman of the Board of an industrial conglomerate like Keppel - leaves the interested observer rather puzzled.

"Yes, they were good long term investments with risks thoroughly assessed"

- Minister Tharman, Jan 2008 on Singapore investments in banks.

These were the words of Singapore's Minister of Finance, slightly more than a year ago when Singapore's SWFs made major investments in a few global financial institutions. Take note, in particular, that Minister Tharman was defending the individual investments made by the SWFs in the banks - not the portfolio performance.

A year later, everything had changed. The stock markets had declined significantly and the global financial system was in major turmoil. The stock prices of the big banks had sunk to record lows after having their balance sheets destroyed by the dislocation in credit markets. Seeing that his original argument was no longer tenable, Tharman changed his tack as the investments in the banks sunk deeper and deeper into the red. Now, instead of taking the line that the investments in the banks were good long term investments, he instead argued that Singapore's portfolios were well diversified, and hence Singapore's investments were fine.

'We would be worried if global banks comprise a large proportion of the portfolios of GIC and Temasek, or for that matter, any other highly vulnerable industry globally,' he said. 'But these are diversified portfolios, with not a large degree of concentration risk.'

Wednesday, April 15, 2009

As DBS staff bid their final farewell to chief executive Richard Stanley, who died of leukemia last Saturday, the shares of Singapore's biggest bank continued to rally. DBS stock price continued its rise, even as Mr. Stanley's cortege passed through Shenton Way this afternoon. This is despite the fact that in the last four months, it has been Mr. Koh Boon Hwee, Chairman of DBS and a non-banker, who has been steering the DBS ship amidst Stanley’s absence and Singapore's steepest recession.

DBS' stock rise comes amidst a broader market rally. It is thus not clear if the stock rise indicates that investors are placing confidence in the bank's chairman, or if it is a simply a stock movement in tandem with the broader market. The DBS board, nevertheless, feels that Mr Koh is worth his weight in gold.

In comparison to Mr. Stanley who was paid almost $5 million for eight months of work in 2008, Mr. Koh has received $2 million in 'special remuneration' from DBS for assuming an 'active management oversight' role from Jan 1 to April 30 last year.

Thursday, March 05, 2009

Lee Kuan Yew is all over the news today, talking about GIC's 25% loss. In particular, he has been defending GIC's investments in the banks. I've written extensively about these investments, but MM Lee's latest attempts and defending GIC are some of the crappiest shit I've seen in a while.

Damn it - I'm just absolutely fed up with Lee's crap. For goodness sake already, just own up and admit that GIC did not have a clue.

'We became cash-rich and when the market fell, we went into UBS and Citi,' he said. 'But we went in too early. That's part of the ride.'

...

'How could we have known this was the extent of the damage? You look at all the big-name banks - they have gone down, misjudged the situation, ruined their careers,' Mr Lee said.

Here's the octogenerian politician, trying to wriggle his way out by claiming that GIC could not have known the extent of the damage. He blames the big-name bankers for ruining their careers, and says its all "part of the ride".

Well, thats a bucketload of bullcrap.

You want to know how you could have "known the extent of the damage", Mr Lee?? I'll Tell You HOW!!!

SINGAPORE: The Government of Singapore Investment Corp (GIC) has said it will convert its convertible preferred notes in the US lender Citigroup to common stock in a bid to help shore up the troubled US lender.

The exchange price is US$3.25 a share – a 32 per cent premium to Citigroup's closing price on Thursday. The price is way under the conversion price of US$26.35 a share under the original terms of the investment.

HONG KONG (MarketWatch) -- Singapore's economy contracted at an annualized 16.4% in the October-to-December quarter, its sharpest pace of contraction in 33 years, according to revised figures released Thursday by the Ministry of Trade and Industry. For the whole of 2008, the economy grew 1.1%, after expanding 7.8% the preceding year, the ministry said in the 169-page Economic Survey of Singapore report. The manufacturing sector declined 10.7% in the fourth quarter on year, while the services sector was down 1.3%. Initial estimates published in January were for a 16.9% annualized contraction in the fourth quarter.

Think that's bad?

Wait until you compare this contraction with other economies around the world, and you'll see how bad it really is.The following image, courtesy of the Business Times, tells a thousand words.

Hmm. No wonder that Singapore's economists are not particularly optimistic. Here's some quotes to ponder, and enjoy (bold added):

'The manufacturing weakness story is well known, but the main thing is the speed and severity with which the services sector rolled over,' said OCBC economist Selena Ling. 'When two of your engines fall off, you can't see the economy flying at all.'

...latest estimates prompted OCBC to cut its 2009 full year forecast, from -2.8 per cent to -4.8 per cent. 'Frankly, we don't see any light at the end of the tunnel for financial services. It will be the main drag on services,' said Ms Ling. 'And we think consumption will fall off the cliff once we get the retrenchment numbers.'

...

'Broadly speaking, 2008 was a year to forget,' said Standard Chartered economist Alvin Liew. 'The data revision was minimal. It was already bad but it got a little bit worse,' he said.

Well well, I guess the PAP ministers can't possibly be patting their backs this time, like they always do each time Singapore announces its economic growth numbers. A marketwatch commenter has hit the nail squarely on the head:

"Wonder if their egos shrank at the same rate? They must have put the economy through the wringer and then the dryer. Should never wash cotton economies in hot water and then dry in dryer."

Ha ha ha. But now let's get serious.

What's the prospects for Singapore's economic recovery? How is our growth possibly going to be restored? Stanchart's Mr Liew, again:

Stanchart's Mr Liew noted that much of the fall-off in total demand was due to a 9.6 per cent drop in external demand in the fourth quarter. ...

'The recovery process - if we see any at all - needs to come from the external sector. If that doesn't recover, we are looking at a very protracted downturn,' he said.

Singapore's export oriented economy means that any recovery is going to be driven by a revival in exports, driven by our biggest export markets - US and Wester Europe. And what's happening to those economies right now? Hmm... let's see:

A raft of data due out is expected to show the recession-hit economy is worsening. Among the reports, non-farm payrolls for February will shed light on the labor market, with analysts expecting unemployment to reach 7.9 percent.

Following Friday's fall in U.S. stocks, with the S&P 500 closing at a 12-year low, analysts are watching to see if indexes can hold and recover from these lows, suggesting a bottom has been formed, or whether stocks have further depths to plumb.

"We continue to get hit on a daily basis by very bad economic news and the markets are trying to put in a stand here at the November 2008 lows," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

In his eagerly anticipated annual letter to Berkshire shareholders, Buffett also offered a gloomy economic outlook, saying "the economy will be in shambles throughout 2009 -- and for that matter, probably well beyond."

European Union economic confidence plunges to new lowMARK SMITH, Deputy Business Editor, February 27 2009

Business and consumer confidence across the 27-nation European Union plunged to new low in February, an influential survey has revealed in the latest sign that the recession is continuing to deepen in the UK's largest export market.

The declining global economy seriously hampers the ability of any nation to trade its way out of recession - and the apparent advantages of weak sterling remain of little consequence to exporters in a world where demand has fallen off a cliff.

News of the latest survey, conducted by the European Commission, also came as the unemployment rate in Germany, Europe's largest economy, edged up to 8.5% in February following a much sharper rise the previous month.

Sorry to break all the bad news, but i guess the state of the economy is what it is right now. No use papering over the cracks.

I guess it's not a surprise then that "PM Lee ... did not rule out the possibility that the Singapore economy could shrink by as much as 8 per cent this year." (ST)

Almost half of all the complex credit products ever built out of slices of other securitised bonds have now defaulted, according to analysts, and the proportion rises to more than two-thirds among deals created at the peak of the cycle.

The defaults have affected more than $300bn worth of these collateralised debt obligations, which were built from bits of other asset backed securities (ABS) such as mortgage bonds, other CDOs and structured bonds, or derivatives of any of these, according to analysts at Wachovia and Morgan Stanley.

So-called CDOs of ABS caused huge losses to banks such as Merrill Lynch, UBS and Citigroup, which held large amounts of the supposedly safest, top-rated chunks of them. They have since been damned by bodies such as the Bank for International Settlements as being too complex to risk manage effectively.

CDOs of ABS were used increasingly at the peak of the credit bubble to keep the securitisation machine moving by recycling hard to sell bits of subprime mortgage bonds and other risky tranches into new structures with top-notch credit ratings.

However, the ratings of these deals proved unsustainable, as evidenced by the fact they have accounted for 92.9 per cent of all 16,587 ratings downgrades globally from all rating agencies since the beginning of last year, according to Morgan Stanley.

But now, at long last, one shard of reality has just emerged to piece this gloom. In recent weeks, bankers at places such as JPMorgan Chase and Wachovia have been quietly sifting data trying to ascertain what has happened to those swathes of troubled CDO of ABS.

The conclusions are stunning. From late 2005 to the middle of 2007, around $450bn of CDO of ABS were issued, of which about one third were created from risky mortgage-backed bonds (known as mezzanine CDO of ABS) and much of the rest from safer tranches (high grade CDO of ABS.)

Out of that pile, around $305bn of the CDOs are now in a formal state of default, with the CDOs underwritten by Merrill Lynch accounting for the biggest pile of defaulted assets, followed by UBS and Citi.

The real shocker, though, is what has happened after those defaults. JPMorgan estimates that $102bn of CDOs has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.

I still can't understand how our Government can characterise GIC's and Temasek's performance as "not disreputable".

Saturday, February 21, 2009

In April 2008, this blogger took note of Lee Kuan Yew's comments in an interview with Bloomberg. The octogenarian Minister Mentor was defending GIC, the Singaporean sovereign weath fund of which he is Chairman, which had made investments in UBS and Citigroup just months before. I have previously dealt with Citigroup and the prospect of its equity investors being wiped out due to nationalisation. But for this post, the subject of my analysis is UBS.

The Minister Mentor went on the record complimenting the private banking franchise of UBS, citing this as the reason why GIC made a significant investment in the famous Swiss bank:

"The franchise of the banks, the expertise that they have, under proper leadership, they will be able to recover and rise again ... Will there be another Swiss bank like UBS for wealth management? I doubt it, we doubt it, that is why we invested in it." -MM Lee, in a Bloomberg Interview, Apr 08

In an expression of his support for UBS, the Minister Mentor's GIC duly bet US$10 Billion of Singapore's hard-earned reserves that UBS would recover, with its revival driven by the world-renowned reputation of UBS' private banking business. Nevermind the huge investment banking losses that UBS had sustained - at least its private banking business was still intact and relatively untarnished.

Well, this week, that reputation for integrity has all but evaporated. UBS has admitted to defrauding the US government by helping some of its US clients conceal their assets. It is also paying US$780 million in fines and compensation to the US govt as a result.

UBS to Pay $780 Million Over U.S. Tax ChargesSwiss Bank to Name Some U.S. Clients

UBS, Switzerland's largest bank, agreed yesterday to pay $780 million to settle civil and criminal charges by the U.S. government that it helped thousands of American clients use Swiss accounts to evade U.S. taxes.

UBS also agreed to turn over the names of some of those clients.

The settlement ended a legal battle that pitted Switzerland's legendary tradition of bank secrecy against the U.S. government's determination to crack down on tax cheats.

But how the U.S. government resolved perhaps the central issue in its dispute with UBS was not disclosed, making it hard to assess how much the government gained in its battle against tax evasion.

The Justice Department charged that over several years UBS provided Swiss bank accounts to approximately 20,000 U.S. clients with assets of about $20 billion. About 17,000 of those clients concealed their identities and the existence of their UBS accounts from the IRS, the Justice Department alleged.

A key question in the investigation was whether the bank and the Swiss authorities would divulge information about all of the thousands of clients the U.S. government suspected of using UBS accounts to evade taxes or only those clients who met the much narrower Swiss legal conditions for parting the curtain of bank secrecy.

...

"UBS avoided compliance with U.S. securities laws for many years, at the same time they were engaged in other illegal conduct, which makes this one of the most egregious cases of its kind," Scott W. Friestad, deputy director of enforcement at the SEC, said in a statement.

...

"It is apparent that as an organization we made mistakes and that our control systems were inadequate," UBS chief executive Marcel Rohner said.

You might think $780 million is enough to settle the case. But the real damage has only just begun. The true fallout will be seen when UBS is finally forced to disclose the names of the US citizens who have secret bank accounts with UBS. This will truly shake the foundations of the private banking industry in Switzerland and set a new precedent for the private banking industry all over the world - including in Singapore. The prospective disclosure is now part of a civil lawsuit that US government is filing against UBS.

Feb. 19 (Bloomberg) -- The U.S. government sued UBS AG, Switzerland’s largest bank, to try to force disclosure of the identities of as many as 52,000 American customers who allegedly hid their secret Swiss accounts from U.S. tax authorities.

U.S. customers had 32,940 secret accounts containing cash and 20,877 accounts holding securities, according to the Justice Department lawsuit filed today in federal court in Miami. U.S. customers failed to report and pay U.S. taxes on income earned in those accounts, which held about $14.8 billion in assets during the middle of this decade, according to the court filing.

“At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes,” John A. DiCicco, acting assistant attorney general in the Justice Department’s tax division, said in a statement.

...

Roy Smith, a finance professor at New York University’s Stern School of Business and a former Goldman Sachs Group Inc. partner, said a UBS loss in the case would be “very bad news” for Swiss banks.

Swiss Secrecy

“If you get to the point where you’re able to get information on 52,000 accounts just because they exist, not because of evidence of a crime, you’ve gotten rid of Swiss banking secrecy forever,” Smith said. “If the European Union follows suit, it’ll virtually be the end of secret accounts in Switzerland.”

Swiss banks would still get business from Asia, Russia, eastern Europe and Africa, he noted.

The Justice Department accused UBS of conspiring to defraud the U.S. by helping 17,000 Americans hide accounts from the Internal Revenue Service. The U.S. will drop the charge in 18 months if the bank reforms its practices, helps prosecutors and makes payments.

In entering a deferred-prosecution agreement, UBS agreed to a statement of facts that said from 2000 to 2007, it actively helped “U.S. individual taxpayers in establishing accounts at UBS in a manner designed to conceal the U.S. taxpayers’ ownership or beneficial interest in said accounts.”

Evading Requirements

UBS bankers “facilitated the creation of such accounts in the names of offshore companies, allowing such U.S. taxpayers to evade reporting requirements,” according to the statement of facts. Prosecutors filed a complaint, unsealed yesterday, accusing UBS of conspiring to defraud the U.S. by helping Americans hide accounts from the IRS.

“UBS and its U.S. clients knew that it violated U.S. law for U.S. taxpayers to maintain undeclared accounts with UBS in Switzerland -- whether the accounts held cash or securities,” IRS agent Daniel Reeves said in a declaration filed with today’s lawsuit.

...

Private bankers went to great lengths to hide their clients’ identities and assure them of Swiss customs of secrecy, prosecutors said in the criminal complaint filed against UBS. In January 2003, after UBS signed an agreement to share tax information with the IRS, bank managers sent U.S. clients letters saying they had kept client identities secret since 1939.

Some bankers went so far as to develop written codes to hide their communications about U.S. clients’ assets, according to court documents filed in today’s lawsuit.

In June, U.S. prosecutors secured the guilty plea of a former UBS private banker, Bradley Birkenfeld, who is cooperating with investigators. Another Switzerland-based UBS banker, Raoul Weil, was indicted on a charge that he helped rich Americans evade taxes.

Private banks take pride in providing their clients with secrecy and privacy. Because many of their clients are exceptionally wealthy and do not wish for the composition or magnitude of their assets to be known to the public. But in this case, UBS clearly went too far. It abused the bank secrecy laws for its clients and helped to facilitate tax fraud - and the worst thing is that UBS has admitted doing so knowingly and for several years. Is this what Lee Kuan Yew and his son, Prime Minister Lee Hsien Loong, are trying to model Singapore after?

Singapore in recent years has made massive efforts to enter into the integrated resort (gambling) and private banking industries. Both are heavily interrelated in that they both attract money inflows from the rich and wealthy. But which rich and wealthy are we trying to attract?

Some of you might remember that in October 2006, a certain Andy Xie, who was then Asia Chief Economist of Morgan Stanley, was fired after making certain comments about Singapore's Economy. Amongst the derisive comments he made about Singapore's economy, the following were the most cutting:

"Actually, Singapore’s success came mainly from being the money laundering center for corrupt Indonesian businessmen and government officials. Indonesia has no money. So Singapore isn’t doing well. To sustain its economy, Singapore is building casinos to attract corrupt money from China." - Andy Xie, ex Morgan Stanley Asia Chief Economist

Is this what Singapore is turning into, a full fledged money laundering center? Is this the plan, with two massive integrated resorts flying high-rollers from the region in to gamble with their millions, and many more private banks to stash their cash away in secret accounts, while gambling even bigger sums in the global financial markets?

As a Singaporean, the latest unraveling of tax fraud charges against UBS, the largest private bank in the world, truly makes me shudder. Switzerland, at least, has other things to fall back upon when it faces a setback of such magnitude. But can Singapore's reputation and economy survive such a hit if something similar happens to us in the future? Our government has not had many ideas in recent years to drive Singapore's growth - and if our push into IRs and private banking fails, Singapore's economic growth could be set back several long years.

GIC's bet on UBS is a mistake that Singapore can ultimately recover from. But the PAP's bet on private banking and gambling may someday prove to be catastrophic for our nation.

Thursday, February 19, 2009

Well well, things are getting exciting. All of us know that GIC is reported to have incurred losses of US$33 Billion. All of us know that the government keeps on saying that GIC & Temasek are long term investors. And guess what, the press reported that GIC expects long-term returns from its bank investments (and I think, that's what Temasek expects as well)

Feb. 17 (Bloomberg) -- Government of Singapore Investment Corp., one of two sovereign wealth funds owned by the island, lost as much as S$50 billion ($33 billion) in 2008, the Wall Street Journal said, citing two people familiar with the matter.

The fund doesn’t plan to get rid of its investments including in Citigroup Inc. and UBS AG even as asset values plummet, the newspaper said. GIC expects the two banks to provide substantial long-term returns, according to the report.

Sovereign wealth funds in Asia and the Middle East have pumped money into global financial institutions to help replenish capital eroded by writedowns and losses that have topped $1 trillion globally. GIC, overseeing more than $100 billion of reserves, has invested about $18 billion in UBS and Citigroup since December 2007.

I think few people truly appreciate what is going on in the global economy today. Many people think that what we are going through is just a short-term recession, like those of the last decade. They think that after a short period of contraction, our economy will bounce back quickly. They think that the stock market will start rising soon and that the housing market will recover soon.

But very few people alive today have lived through an economic deterioration of today's proportions. Very few people alive today will ever live through another economic downturn of today's proportions. What we are looking at is a downturn of unprecedented proportions, unseen since the Great Depression of the 1930s. But don't take my word for it. Take it from Alan Greenspan, take it from the IMF Chief, take it from investment heavyweights like Marc Faber.

My first quote comes from the IMF Chief, who warned earlier in January that the world faces a global crisis:

World Faces Deepening Crisis, IMF Chief Warns

January 21, 2009

-IMF head says economic prospects even worse than previous projections-Warns of risk of social unrest in some hard-hit countries-Says more governments expected to access IMF lending

The world faces a deepening economic crisis, with the slowdown in advanced economies now spreading to major emerging markets such as China, India, and Brazil, Dominique Strauss-Kahn, IMF Managing Director, warned.

He said the IMF would significantly adjust downward its forecast for world growth for 2009 when the 185-member international institution announces a revised assessment of the global economy on January 28. In an update released last November, the IMF had said that advanced economies would see a contraction in output in 2009—the first since World War II—but that growth in major emerging markets would still enable the global economy to advance by 2.2 percent in 2009.

Deteriorating outlook

But Strauss-Kahn said in an interview with the BBC's Hardtalk program, broadcast on January 21, that economic prospects had worsened over the past few months and the IMF would announce lower numbers at the January 28 press conference in Washington DC.

"So 2009 will not be a good year for the world economy, even if we see recovery at the beginning of 2010," he said.

Prospects were worse than expected not just in the United States and Europe but also in major emerging market economies such as China, India, and Brazil, which would experience very low growth compared with recent historical trends.

...

More on spending side

A number of governments around the world have announced stimulus plans, including in the United States, Japan, Europe, China, and India. But Strauss-Kahn said he did not think enough had been done so far. "In Europe especially, they are still behind the curve," he said. "There needs to be more done on the spending side, especially because the reaction of the economy to more spending is quicker than the reaction to a decrease in taxes."

The European Commission said on January 19 it expected that the 16 countries using the euro would see their economies shrink by 1.9 percent in 2009.

Strauss-Kahn warned of the risk of social upheaval and unrest in some countries worst affected by the downturn and said he expected additional countries to seek IMF help, not just in Eastern Europe, but elsewhere in the world, including Latin America where some countries were "just on the edge."

...

Meltdown avoided

Strauss-Kahn said the world had avoided a total meltdown of the financial system as a result of coordinated intervention by major central banks last October. "We were very close in September to a total collapse of the world economy," the former French finance minister revealed.

He defended the IMF's different prescriptions for different economies, arguing that while major advanced economies could afford to boost spending and run up larger deficits to help get out of the recession, other crisis-hit countries, particularly the emerging markets of eastern Europe, do not have the same budgetary room to maneuver because inflows of capital had dried up and their currencies were under pressure.

The world has gone from the greatest synchronized global economic boom in history to the first synchronized global bust since the Great Depression. How we got here is not a cautionary tale of free markets gone wild. Rather, it's the story of what can happen when governments ignore market signals and central bankers believe in endless boomss...

As a consequence of this expansionary cycle, the world experienced between 2001 and 2007 the greatest synchronized economic boom in the history of capitalism. Past booms -- of the 19th century under colonial economies, or after World War II when 40% of the world's population remained under communism, socialism, or was otherwise isolated -- were not nearly as global as this one....

The cracks first appeared in the U.S. in 2006, when home prices became unaffordable and began to decline. The overleveraged housing sector brought about the first failures in the subprime market.

Sadly, the entire U.S. financial system, for which the Fed is largely responsible, turned out to be terribly overleveraged and badly in need of capital infusions. Investors grew apprehensive and risk averse, while financial institutions tightened lending standards. In other words, while the Fed cut the fed-funds rate to zero after September 2007, it had no impact -- except temporarily on oil, which soared between September 2007 and July 2008 from $75 per barrel to $150 (another Fed induced bubble) -- because the private sector tightened monetary conditions.

In 2008, a collapse in all asset prices led to lower U.S. consumption, which caused plunging exports, lower industrial production, and less capital spending in China. This led to a collapse in commodity prices and in the demand for luxury goods and capital goods from Europe and Japan. The virtuous up-cycle turned into a vicious down-cycle with an intensity not witnessed since before World War II.

NEW YORK (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan said on Tuesday the current global recession will "surely be the longest and deepest" since the 1930s and more government rescue funds are needed to stabilize the U.S. financial system.

"To stabilize the American banking system and restore normal lending, additional TARP funds will be required," Greenspan said in a speech to the Economic Club of New York. The U.S. Treasury's Troubled Asset Relief Program designed to help bail out banks has been partially successful, he said.

Despite his prognosis on the current downturn, Greenspan said the pace of economic deterioration "cannot persist indefinitely."

He reiterated, however, that a housing recovery is a necessary condition for the end of the financial crisis, and said that "the prospect of stable home prices remains many months in the future."

The stock market, meanwhile, is being suppressed by "a degree of fear not experienced since the early 20th century," Greenspan said. "Certainly by any historical measure, world stock prices are cheap. But as history also counsels, they could get a lot cheaper before they turn."

As you can probably tell, I am not bullish about the global economy. I am not bullish about the stock markets nor the housing markets. I think those who think we have reached a bottom and are currently hunting for value in the markets are likely to be caught in a "value trap" - when asset prices look cheap relative to recent valuations but are actually in a secular downtrend brought about by prolonged recession.

The value mentality was extremely useful in the past decades when the global economy was in a secular uptrend, and downturns could be expected to turn around relatively quickly. Recessions were relatively short and markets turned from bust to boom relatively quickly. But this is different. What we are seeing is debt deflation and a collapse in the credit system. What we are seeing is a fundamental unwinding of the banking system and the asset bubbles that cheap credit spawned in the last decade.

And I don't think that the stimulus package passed by the US Congress is going to be much more than a band-aid. Nor is the new housing plan unveiled this morning going to do much to stem the continued correction in housing prices. What will be needed will be bold, corrective action taken to fix the credit system - not the weak TARP ideas that Paulson and Geithner have been trying in the past few months, which simply try to prop up ailing banks with liquidity but that do little to fix the underlying credit problems facing banks.

Hence, I think stocks, housing and other prices still have some way down to go. The following chart, courtesy of the New York Times, illustrates this point:At its current level of about 15, the P/E of the S&P 500 using a 10-year average of earnings certainly suggests stocks are much cheaper than they were a in years past. But “cheap” depends entirely on the context we view the valuations. It is certainly true that stocks are now priced lower than at any other time since 2000, when the current period on contracting valuations began. But it is also true that stocks remain at least 50% over-valued compared to previous long-term valuation lows seen in the 1930’s, 1940’s, and the early 1980’s.

The argument that we should buy stocks now because they are “cheap” is questionable investment analysis because it ignores the current economic environment we are in and the possibility that stocks could still get much cheaper than they are now. We know they can because it has happened before, and there is every possibility that the markets could easily decline another 20-30%.

On the economic side, I have already articulated my thoughts on the impact on Singapore's economy. Unlike Tharman Shanmugaratnam, I think that Singapore's economy isn't bouncing back any time soon. Thus, I'm sitting in cash and tightening my belt to wait for what might be a forthcoming investment opportunity of a lifetime.

Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics. First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment. Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes. Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. Admittedly, bailout costs are difficult to measure, and there is considerable divergence among estimates from competing studies. But even upper-bound estimates pale next to actual measured rises in public debt. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.

Tuesday, February 17, 2009

Some time ago, Singapore's heavily export-oriented growth model came under fire. The Wall Street Journal published an opinion piece, criticising the lop-sided dependence on exports and the crowding out of the private sector by the government:

The export-led economy is falling on its face. Minister Tharman Shanmugaratnam predicts the city-state is "likely to experience" the deepest recession in its history. The government will tap its reserves to help pay for the stimulus package. Growth contracted 16.9% in the fourth quarter last year. The Ministry of Trade and Industry has revised down GDP forecasts twice this month already, and expects the city-state's growth to contract 2% to 5% this year. The pain is now leaking into the domestic economy as consumers retrench.

Singapore's economy would be more resilient if it were better balanced. Consumption composes only about 40% of GDP -- far less than other developed Asian economies, nearer to 55%. Yesterday's budget doesn't do much to change long-term incentives to consume. The government announced a 20% income-tax rebate for one year, but no permanent cuts. Nor did it cut the 7% goods and services tax. Singaporean workers and businesses invest a total of 34.5% of wages into the state pension fund, but receive less than a 2% return from the government. That's a measly payout compared to what private funds return over long investment periods.

These thoughts and others were echoed by many financial and economic analysts around the world. Naturally, however, Singapore's government took a stand against its critics, and Tharman Shanmugaratnam was forced to declare that "Singapore's Growth Model Works", in defence of the government's economic policies:

The Government will keep restructuring the economy to emerge 'leaner and smarter' after each downturn, Finance Minister Tharman Shanmugaratnam said in an interview with Bloomberg Television on Wednesday.

'The fundamentals of our growth model are sound,' he said, adding that 'we should not be less susceptible to global markets. That's our future, that's where our fortunes are tied to'.

Singapore's economy may shrink a record 5 per cent this year as the global recession erodes demand for exports and companies lay off workers.

...

'We are plugged into the markets that are largely in the rich countries and when we go through a global crisis like this, we come down very quickly,' Mr Tharman said, adding that there was no Asian domestic demand to provide a cushion for Singapore

...

'Singapore will come out of this,' said Mr Tharman. 'We will bounce back the way we've bounced back three times already in 10 years.'

But the global bloodbath makes it increasingly unlikely that Singapore is going to bounce back any time soon. This global recession is the worst since world war II, and some even say that recession is an understatement - they say that we are in for an economic depression.

Feb. 17 (Bloomberg) -- Japan’s economy, only months ago forecast to be the best performing among the world’s most advanced nations, has become the worst.

Gross domestic product shrank an annualized 12.7 percent last quarter, the Cabinet Office said yesterday. The contraction was the most severe since the 1974 oil crisis and twice as bad as those in Europe or the U.S.

The credit crisis that crippled the U.S. financial system may have also knocked out the props that supported Japanese growth between 2002 and 2007: a U.S. consumer-spending bubble and a cheap yen. The speed of the deterioration has taken companies by surprise: Toyota Motor Corp. this month forecast a 450 billion yen ($4.9 billion) loss, reversing a November estimate it would make 550 billion yen.

“We thought this would be a cyclical slowdown for the Japanese economy,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. “It’s now clearly a structural one. Eventually we should see some stabilization in consumption globally, but there just won’t be the same” willingness to fund spending by taking on debt, he said.

...

‘Devastating Effects’

The end of easy credit in the U.S. will lead to a “quantum downward shift” in consumer spending in the world’s largest economy that may have long-term and devastating effects on economies that have relied on it, according to Allen Sinai, chief global economist at Decision Economics Inc. in New York. Exporters Toyota and Canon Inc. get more than a third of their sales in North America.

“Companies that planned their businesses around the idea that U.S. consumer spending would grow by 3 percent per year, as it has for decades, are in for a shock,” said Sinai, who spoke in an interview in Tokyo after he briefed Japan’s biggest business lobby, Keidanren, on the U.S. outlook.

Indeed, Japan's economic woes are reflective of what is happening across the troubled east asian tigers - economies that are heavily dependent on exports for economic growth. Singapore, Taiwan and Korea are facing steep falls in exports as the US & European financial systems implode, causing massive deleveraging and sharp drops in consumer spending previously fueled by easy credit.

Yet many of Asia’s tiger economies seem to have been hit harder than their spendthrift Western counterparts. In the fourth quarter of 2008, GDP probably fell by an average annualised rate of around 15% in Hong Kong, Singapore, South Korea and Taiwan; their exports slumped more than 50% at an annualised rate. Share prices in emerging Asia have plunged by almost as much as during the Asian financial crisis a decade ago. That crisis was caused by Asia’s excessive dependence on foreign capital. This time the tigers have been tripped up by their excessive dependence on exports.

...

In the fourth quarter of 2008, real GDP fell by an annualised rate of 21% in South Korea and 17% in Singapore, leaving output in both countries 3-4% lower than a year earlier. Singapore’s government has admitted the economy may contract by as much as 5% this year, its deepest recession since independence in 1965. In comparison, China’s growth of 6.8% in the year to the fourth quarter sounds robust, but seasonally adjusted estimates suggest output stagnated during the last three months.

Asia’s richer giant, Japan, has yet to report its GDP figures, but exports fell by 35% in the 12 months to December. In the same period, Taiwan’s dropped by 42% and industrial production was down by a stunning 32%, worse than the biggest annual fall in America during the Depression.

Asia’s export-driven economies had benefited more than any other region from America’s consumer boom, so its manufacturers were bound to be hit hard by the sudden downward lurch. Asian exports are volatile anyway. And though the 13% fall in the region’s exports in the 12 months to December was slightly smaller than in 1998 or 2001, those dismal records seem certain to be beaten soon.

The plunge in exports has been exacerbated by the global credit crunch, which made it harder to get trade finance. Destocking on a huge scale has further slashed output. Trade within Asia has dropped by even more than the region’s sales to America or Europe. Exports to China from the rest of Asia were 27% lower in December than a year earlier, partly reflecting weaker demand for components for assembly into goods for re-export.

The press has mostly focused on the financial meltdown in the US. Yet, the European financial system now appears to be in an even worse condition than their American counterparts. John Mauldin analyses the dire situation in Europe:

European Bank Losses Dwarf Those in the US

...

But European banks may be in far worse shape. Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars! The concern is that bailing out the various national banks for such an unbelievable amount would push the cost of government borrowing to much higher levels than we see today.

...

Waterfield reports, "National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors -- particularly those who lend money to European governments -- have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

...

Part of the problem is that European banks were far more highly leveraged than US banks. Some banks were reportedly leveraged 50:1. And they lent money to Eastern European projects and businesses which are now facing severe financial strain and plummeting local currencies.

Let that number rattle around in your head for a moment: $25 trillion. Even $5 trillion would be daunting. But the problem is that Europe does not have a central bank that can step in and selectively save banks from one country without taking on all euro zone member-country banks. Yet, as noted above, some countries may not have the wherewithal to save their own banks. It is reported that some Austrian banks are hoping that Germany will step in and help them. Given Germany's problems, they may have a long wait.

The slump in exports is not just driven by a drop in US demand alone - it is driven by a broad-based drop in consumer spending in East Asia's key export markets of Europe and the USA, economies whose financial systems are up to their noses in toxic credit and whose financial problems aren't going to be solved any time soon. At the same time, there has been broad-based concern about the Obama administration's lack of leadership in coming up with a detailed plan for fixing the credit system. Tim Geithner's recent speech inspired no confidence in analysts and business leaders, and has left much to be desired:

The Obama rescue

Feb 12th 2009

From The Economist print edition

This week marked a huge wasted opportunity in the economic crisis

By any recent historical standards America’s banking bust is big. The scale of troubled loans and the estimates of likely losses—which are now routinely put at over $2 trillion—suggest many of the country’s biggest banks may be insolvent. Their balance-sheets are clogged by hundreds of billions of dollars of “toxic” assets—the illiquid, complex and hard-to-price detritus of the mortgage bust, as well as growing numbers of non-housing loans that are souring thanks to the failing economy. Worse, banks’ balance-sheets are only one component of the credit bust. Most of the tightness of credit is owing to the collapse of “securitisation”, the packaging and selling of bundles of debts from credit cards to mortgages.

Fixing this mess will require guts, imagination and a lot of taxpayers’ money. Mr Geithner claims he knows this. “We believe that the policy response has to be comprehensive and forceful,” he declared in his speech, adding that “there is more risk and greater cost in gradualism than aggressive action.”

But his deeds did not live up to his words. His to-do list was dispiritingly inadequate on some of the thorniest problems, such as nationalising insolvent banks, dealing with toxic assets and failing mortgages. Mr Geithner promised to “stress-test” the big banks to see if they were adequately capitalised and offer “contingent” capital if they were not. But he offered few details about the terms of public-cash infusions or whether they would, eventually, imply government control. His plan for a “public-private investment fund” to buy toxic assets was vague and its logic—that a nudge from government, in the form of cheap financing, would enliven a moribund market—was heroic. Banks’ balance-sheets are clogged with toxic junk precisely because they are unwilling to sell the stuff at prices hedge funds and other private investors are willing to pay. Vagueness, in turn, led to incoherence. How can you stress-test banks if you do not know how their troubled assets will be dealt with and at what price? Amid these shortcomings were some good ideas, such as a fivefold expansion of a $200 billion fledgling Fed facility to boost securitisation. But for nervous investors and worried politicians, desperate for details and prices, the “plan” was a grave disappointment.

So, is Singapore really going to "bounce back" like it has bounced back "3 times in the last 10 years," as Tharman Shanmugaratnam claims? The dire straits of the global economic situation point to a resounding NO! Indeed, far from looking like it is going to bounce back like it has in the past, Singapore looks like it is in for a protracted recession.

On top of that, to compound the situation, just as Singapore is entering into its worst ever recession, its reserves are getting pounded by the collapse in global markets. Temasek recently reported that it lost 31% to Nov 08, and GIC is rumoured to have lost a whopping 41% on its portfolio! Just when Singapore needs its reserves the most, it is finding that its investments are evaporating by the bucketloads.

The implications, then, of this economic and financial crisis, are going to be deep and profound. More PAP sacred cows are likely to be slaughtered, as workers lose their jobs and find themselves without a social safety net. The lack of a quick economic rebound will mean that unemployment is likely to rise and stay at high levels - the Singapore government will need to re-think its policy on social handouts in order to deal with the growing social unrest brought about by the steep downturn. More pro-worker policies like those championed by the workers' party are likely to gain ground in the minds of Singaporeans as they feel the pinch of a protracted recession.

Economically, the government is going to have to come up with better ideas than just orienting Singapore's economy for export markets. The receding of the tide of easy credit has caught Singapore with its pants down, and it is going to have to find a new set of clothes because the tide isn't coming back up anytime soon to cover Singapore's exposed ass.

Singapore's reputation with the management of its reserves is also likely to take a severe hit. The performance of Temasek, and that of GIC - which is yet to be released but unlikely to be very good - has been unexceptional in this global downturn. One would have expected the best and the brightest of Singapore's elite to have at least somehow anticipated the the credit crisis and have at least had some foreknowledge of the lax credit standards and massive leverage that was accumulating in the US and EU financial systems. Yet not only did they miss the boat, they got very badly hurt in the process of investing in financial institutions such as UBS, Citigroup, Merrill and Barclays.

In short, the global economic meltdown means that Singapore's export-dependent economy isn't bouncing back any time soon. And given that the PAP's hegemony has been built on economic policies that have failed to factor in the oncoming structural change in global headwinds, Singapore looks like it is in for much change in the years to come.